Industry Failing Under Weight of Russian Reform

RYAZAN, Russia — The 8,500 workers of the Lenin Komsomol Electronic Device Factory are tending their home gardens instead of their machines this summer. The neighboring cash register plant closed down this month, putting another 8,000 people on forced vacations.

Of the 24 other giant factories in this mid-size Russian town, all have either shut their gates or shifted to three-day weeks since July 1.

This, Ryazan's industrialists say, is the Russian government's economic dream turned nightmare--the uncontrolled collapse of old Soviet industry before a shiny new capitalist system can be built.

"What's really happening here is the deindustrialization of Russia," said Leonid Kanayev, chairman of a new crisis committee set up by Ryazan's factory directors and unions. "Big industry here is falling apart, particularly the defense plants."

Across Russia, the economy has been contracting at faster annual rates than America's did during the Great Depression, and economists expect the plunge in the key sector of industrial output to be even more catastrophic this year.

Ryazan, a conservative city of 500,000 dominated by big defense factories, has been hit harder and earlier than most, but the same slumps afflict dozens of towns like it.

Rostselmash, a behemoth of a plant on the Don River that produces most of Russia's grain-harvesting combines, has shut down its main production line, throwing 44,000 people out of work. In St. Petersburg, the flagship Kirov factory complex has partially closed. And in Moscow, labor unions say that 90% of the capital's massive defense plants, crippled by layoffs and effectively bankrupt, are facing imminent strikes.

Russian President Boris N. Yeltsin has made a point of shifting his economic policy in recent weeks to try to address industry's plight, issuing a series of decrees and even bringing three former industrialists into his Cabinet.

But his top economists also preach that the country's factories must be weaned from their old socialist-style dependence on government subsidies; they must learn to find their way in a market-driven system. For them, plant closings can be a sign of healthy reform.

"The fact that, until now, until this summer, not a single major or even medium-sized factory has closed in this country signals that economic reform has not really taken effect," government economist Sergei Vasiliev said. "Inevitably, enterprises must close and employment must drop."

Yevgeny Yasin, a professor and another leading Russian economist, said that, although factories could expect more support from the government in the form of loans and credits, they must be rigorously broken of their bad habits, such as refusing to lower their prices even when there is no demand for their goods.

Many factories with faltering demand "put their workers on vacations, but they don't lower prices," Yasin said. "And they look for other ways out, including taking bank loans to pay salaries. At the same time, they radically raise salaries for themselves and their workers."

Government theory may make economic sense. But to Victor Namestnikov, a foreman at the Lenin Komsomol Electronic Device Factory, Yeltsin is simply out to get him. Namestnikov, whose machine-tool unit had employed 200 people but these days has only a skeleton crew, blamed Yeltsin directly for the vacant workstations on his factory's floor. "Some people think that this is the aim of our government--to destroy the state sector," he said angrily. "How it will end, I don't know. If it were only us--but it's all factories. . . ."

Plant directors make similar accusations and maintain that their main problem is not prices or dropping demand but government-condoned financial chaos and a breakdown of the credit system. "We have nothing to pay with," said Shamil Nurmukhametov, acting director of the Lenin Komsomol factory. "If we can't work, gradually everything will stop."

Technically, Nurmukhametov's factory is in the black. Customers owe it nearly $4 million, compared with the $3 million or so it owes to its suppliers. But beginning this month, Nurmukhametov said, suppliers are supposed to deliver only what has been prepaid, and there is no money for prepayment.

"It ends up that I can't buy from you because you're demanding payment, and I also can't sell to someone else because he won't have the money to pay me," Kanayev said. "So factories are left just hanging in the air--they end up at a standstill."

In part, this dilemma is the factories' own fault. Trying to keep doing business in the old style, they have run up mind-boggling debts to each other of more than 2 trillion rubles--almost $20 billion--since January by continuing to buy and sell, using IOUs and counting on salvation from Yeltsin.

Now, with the government attempting to crack down on credit and with the IOU system toppling under its own weight, production is grinding to a halt.